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First Time Buyer Resources

What’s the potential cost of waiting?

As we continue on in our First Time Buyer Education Series, we have to address Affordability.

Affordability declines quickly when rates and prices rise together. Consider the potential change in payments with a 10% price increase and a 2% increase in interest rates:

Home Affordability in Brookfield Wisconsin

These hypothetical examples are illustrations for educational purposes only and are not an offer to lend nor a Good Faith Estimate. Examples are for a $250,000 home that rose to $275,000 with a rate increase from 4.50%/4.762% APR to 6.50%/6.95% APR on a zero point 30-year, fixed-rate loan with a 20% down payment, $4,000 in taxes and annual insurance of $580 for the “today” example and $638 for the “tomorrow” example. APRs are calculated using closing costs equal to 3% of the loan amount. Actual costs can be less, and actual rates are subject to change at any time. Qualification for any loan is dependent on individual circumstance and subject but not limited to employment/income, credit history and acceptable liquid assets to close.

 First time home buyers in the Milwaukee area currently have a historical advantage with both low rates and prices. What happens when the trend begins to shift?

You might not qualify to purchase the same house.

Unless your income keeps pace with price and/or rate increases, you may not be able to qualify for the same home you could purchase today. In the example above, the income to qualify increases from $4,038 per month to $5,127 (assuming a debt-to-income ratio of 35%). The 27% increase is much higher than the typical salary increase of about 2% or 3% per year.

In a rising market, you usually can’t out-save appreciation.

When prices are rising, it can be difficult for your savings to outpace the market. For example, if a $300,000 home appreciates by 5% in one year, that’s $15,000 or $1,250 per month. Can you add that amount to what you’re already saving each month?

If interest rates are rising, too, required payments and income increase even more.

Given the recent environment, some may discount the possibility of the 2% increase in the example above, but the 50-year average for a 30-year, fixed-rate conventional loan is approximately 8.375%. That’s almost 4% higher than rates at the time of this writing and would equate to a payment increase of more than $663 per month in the example.

Qualified borrowers have the ability to lock in today’s prices and rates. Buyers who have not yet accumulated a large down payment may find that using a small down payment and paying mortgage insurance is wiser than missing out on low prices and historically low rates.

 We’re here to help when you’re ready to learn more. Contact our team to get started on your free consultation!

When Do You Pay More Than The Cost?

As we continue in our First Time Buyer Education Series, please be sure to Never confuse the amount of your monthly payment with the actual cost of owning. A typical monthly payment includes principal, interest, taxes, insurance and, in some cases, mortgage insurance.

 Example:

$250,000 home

$4,000 per year taxes

$800 per year insurance

$200,000 30 Yr. Fixed Loan at 4%  =

The principal portion of the payment is not a cost; it’s a reduction of the loan balance. With each payment, you increase your equity by the same amount. For our example, the average principal installment for the first year is $294/month.

Owners who itemize can usually deduct the cost of interest and real estate taxes. For our example, an effective tax rate of 28% would reduce the cost by $279/month. (Avg. 1st yr. mo. interest paid of $661 + taxes of $333.33 x 28% = $279) Always consult with your tax advisor regarding your situation.

 Despite the ups and downs, over the last 50 years, annual nationwide appreciation averages more than 5%. Even using a more conservative rate of 3%, the increase in value represents $625/month.

 That brings us to:

Most of these benefits aren’t realized until you sell, so owners still have to be able to make the regular payment each month. Accumulating equity and earning appreciation take time. Consider the cost of maintenance and repairs, too. But when you think about what you would have paid in rent, it’s clear that owning a home can be a great way to build wealth.

And it’s also clear that the true cost is typically far less than what you might write on a check each month. Contact our team to get numbers specific to your purchase price range. 

Note, this scenario is just an example and not intended to reflect the current market or forecast for rates, prices, taxes or insurance. All of these factors are subject to continual change.